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Paper Products: Research meet extracts

May 27, 2008

We recently had a meeting with the management of Paper Products. Here are the key takeaways.
Capacity expansion plans: Paper Products’ greenfield project at Rudrapur in Uttrakhand was commissioned at a cost of Rs 664 m. The plant operated at full capacity in 4QCY07 and 1QCY08. It also reported marginal operating profits in the first year of operation. In CY07, the company reported volume sales of 8% YoY. This included a 13% growth in tonnage volumes of laminates and converted coated and uncoated paper and films. The flexibles and labeling materials grew by 15% YoY. This was mainly on account of the commissioning of the Rudrapur plant. The plant will account for around 25% of the company’s capacity.

Also, with most of the FMCG majors having their plants in the northern region, this will help the company save on the time and transportation cost. Besides this, in CY07, a specialized pouching project and a specialized labels and cartoons line was commissioned at Silvassa and Hyderabad respectively. Its Nagpur plant, a small unit (contributing less than 1.5% of the total turnover of the company in 2007), in view of being unviable, was closed with effect from April 27, 2008. In order to reduce its energy cost, the company has made investments in 66KV and 33KV power supply lines. The company’s Thane plant, which was affected by floods in 2005, is under reconstruction and is expected to commence operations by Dec 2008. These expansions will help the company increase its volumes going forward.

International business: The company exports its products to 42 countries across the globe. Its customers are spread across South Asia, Africa, Middle East, Europe and Central America. The sales have grown at a CAGR of 25% between 2003 and 2007 and by 37% YoY in CY07. It contributes nearly 20% to the topline. While currency risk is a major challenge, with India expected to be a global outsourcing hub, the management is bullish on the exports front.

NASP: PPL’s innovation programme is witnessing good growth. It contributed 30% to the topline in CY07 for the third consecutive year. Since packaging differentiation is constantly required, PPL needs to continuously upgrade and innovate its product offerings. The company has introduced specialised pouches, labels and cartoons. Also, its holographic options are becoming popular. It added 86 new customers in CY07. The segment commands higher margins as compared to the traditional products. With capacity expansion having being completed for specialized products, higher sales are expected going forward.

Challenges ahead: The rising crude prices continue to worry the management. Polymer based plastic films are the main raw materials used for manufacturing packaging films by the company. These plastic films are linked with crude prices that continue to be volatile. The company's raw material cost has significantly increased to 71% of sales in CY07 as compared to 64% in CY02. With lack of bargaining power, the company cannot pass the input price hike. Also, on account of higher attrition, it has to pay higher salaries thereby adding to the margin pressure.

Looking ahead…
At the current price of Rs 46, the stock is trading at a price to earnings multiple of 5.5 times our CY10 estimates. The company has planned capacities for the next 15 to 18 months, which would lead to higher sales going forward. While raw material prices continue to pose a threat, the management believes that the launch of new products would lead to stable margins. Given its focus on innovations and a strong product portfolio coupled with a healthy demand for packaging by the FMCG and retail sector, the company is set for better times going forward.

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